diff --git a/lib/install/inflate-shrinkwrap.js b/lib/install/inflate-shrinkwrap.js
index cd1722abe37..e8e78e714ce 100644
--- a/lib/install/inflate-shrinkwrap.js
+++ b/lib/install/inflate-shrinkwrap.js
@@ -1,9 +1,9 @@
 'use strict'
-var url = require('url')
 var asyncMap = require('slide').asyncMap
 var validate = require('aproba')
 var iferr = require('iferr')
 var realizeShrinkwrapSpecifier = require('./realize-shrinkwrap-specifier.js')
+var isRegistrySpecifier = require('./is-registry-specifier.js')
 var fetchPackageMetadata = require('../fetch-package-metadata.js')
 var annotateMetadata = require('../fetch-package-metadata.js').annotateMetadata
 var addShrinkwrap = require('../fetch-package-metadata.js').addShrinkwrap
@@ -14,16 +14,20 @@ var createChild = require('./node.js').create
 var moduleName = require('../utils/module-name.js')
 var childPath = require('../utils/child-path.js')
 
-var inflateShrinkwrap = module.exports = function (tree, swdeps, finishInflating) {
-  validate('OOF', arguments)
+module.exports = function (tree, swdeps, finishInflating) {
   if (!npm.config.get('shrinkwrap')) return finishInflating()
+  return inflateShrinkwrap(tree.path, tree, swdeps, finishInflating)
+}
+
+function inflateShrinkwrap (topPath, tree, swdeps, finishInflating) {
+  validate('SOOF', arguments)
   var onDisk = {}
   tree.children.forEach(function (child) { onDisk[moduleName(child)] = child })
   tree.children = []
   return asyncMap(Object.keys(swdeps), doRealizeAndInflate, finishInflating)
 
   function doRealizeAndInflate (name, next) {
-    return realizeShrinkwrapSpecifier(name, swdeps[name], tree.path, iferr(next, andInflate(name, next)))
+    return realizeShrinkwrapSpecifier(name, swdeps[name], topPath, iferr(next, andInflate(name, next)))
   }
 
   function andInflate (name, next) {
@@ -33,15 +37,15 @@ var inflateShrinkwrap = module.exports = function (tree, swdeps, finishInflating
       var child = onDisk[name]
       if (child && (child.fromShrinkwrap ||
                     (sw.resolved && child.package._resolved === sw.resolved) ||
-                    (sw.from && url.parse(sw.from).protocol && child.package._from === sw.from) ||
+                    (!isRegistrySpecifier(requested) && child.package._from === sw.from) ||
                     child.package.version === sw.version)) {
         if (!child.fromShrinkwrap) child.fromShrinkwrap = requested.raw
         tree.children.push(child)
-        annotateMetadata(child.package, requested, requested.raw, tree.path)
-        return inflateShrinkwrap(child, dependencies || {}, next)
+        annotateMetadata(child.package, requested, requested.raw, topPath)
+        return inflateShrinkwrap(topPath, child, dependencies || {}, next)
       } else {
         var from = sw.from || requested.raw
-        return fetchPackageMetadata(requested, tree.path, iferr(next, andAddShrinkwrap(from, dependencies, next)))
+        return fetchPackageMetadata(requested, topPath, iferr(next, andAddShrinkwrap(from, dependencies, next)))
       }
     }
   }
@@ -75,7 +79,7 @@ var inflateShrinkwrap = module.exports = function (tree, swdeps, finishInflating
         delete pkg._bundled
         inflateBundled(child, child.children)
       }
-      inflateShrinkwrap(child, dependencies || {}, next)
+      inflateShrinkwrap(topPath, child, dependencies || {}, next)
     }
   }
 }
diff --git a/lib/install/realize-shrinkwrap-specifier.js b/lib/install/realize-shrinkwrap-specifier.js
index f444135e178..0c491a60289 100644
--- a/lib/install/realize-shrinkwrap-specifier.js
+++ b/lib/install/realize-shrinkwrap-specifier.js
@@ -1,11 +1,25 @@
 'use strict'
-var url = require('url')
+var realizePackageSpecifier = require('realize-package-specifier')
+var isRegistrySpecifier = require('./is-registry-specifier.js')
 
 module.exports = function (name, sw, where, cb) {
-  var spec = sw.resolved
-       ? name + '@' + sw.resolved
-       : (sw.from && url.parse(sw.from).protocol)
-       ? name + '@' + sw.from
-       : name + '@' + sw.version
-  process.nextTick(cb, null, spec)
+  function lookup (ver, cb) {
+    realizePackageSpecifier(name + '@' + ver, where, cb)
+  }
+  if (sw.resolved) {
+    return lookup(sw.resolved, cb)
+  } else if (sw.from) {
+    return lookup(sw.from, function (err, spec) {
+      if (err || isRegistrySpecifier(spec)) {
+        return thenUseVersion()
+      } else {
+        return cb(null, spec)
+      }
+    })
+  } else {
+    return thenUseVersion()
+  }
+  function thenUseVersion () {
+    lookup(sw.version, cb)
+  }
 }
diff --git a/test/tap/shrinkwrap-local-dependency.js b/test/tap/shrinkwrap-local-dependency.js
index 8d7c0712f9a..7b68083fcd6 100644
--- a/test/tap/shrinkwrap-local-dependency.js
+++ b/test/tap/shrinkwrap-local-dependency.js
@@ -1,92 +1,120 @@
 var test = require('tap').test
 var path = require('path')
 var fs = require('fs')
-var osenv = require('osenv')
 var rimraf = require('rimraf')
-var mkdirp = require('mkdirp')
 var common = require('../common-tap.js')
-
-var PKG_DIR = path.resolve(__dirname, 'shrinkwrap-local-dependency')
-var CACHE_DIR = path.resolve(PKG_DIR, 'cache')
-var DEP_DIR = path.resolve(PKG_DIR, 'dep')
-
-var desired = {
-  'name': 'npm-test-shrinkwrap-local-dependency',
-  'version': '0.0.0',
-  'dependencies': {
-    'npm-test-shrinkwrap-local-dependency-dep': {
-      'version': '0.0.0',
-      'from': 'dep',
-      'resolved': 'file:dep'
+var Tacks = require('tacks')
+var File = Tacks.File
+var Dir = Tacks.Dir
+
+var testdir = path.resolve(__dirname, path.basename(__filename, '.js'))
+var cachedir = path.resolve(testdir, 'cache')
+var config = ['--cache=' + cachedir, '--loglevel=error']
+
+var shrinkwrap = {
+  name: 'shrinkwrap-local-dependency',
+  version: '1.0.0',
+  dependencies: {
+    mod2: {
+      version: '1.0.0',
+      from: 'mods/mod2',
+      resolved: 'file:mods/mod2',
+      dependencies: {
+        mod1: {
+          version: '1.0.0',
+          from: 'mods/mod1',
+          resolved: 'file:mods/mod1'
+        }
+      }
     }
   }
 }
 
-var root = {
-  'author': 'Thomas Torp',
-  'name': 'npm-test-shrinkwrap-local-dependency',
-  'version': '0.0.0',
-  'dependencies': {
-    'npm-test-shrinkwrap-local-dependency-dep': 'file:./dep'
-  }
+var fixture = new Tacks(
+  Dir({
+    cache: Dir(),
+    mods: Dir({
+      mod1: Dir({
+        'package.json': File({
+          name: 'mod1',
+          version: '1.0.0'
+        })
+      }),
+      mod2: Dir({
+        'package.json': File({
+          name: 'mod2',
+          version: '1.0.0',
+          dependencies: {
+            mod1: 'file:../mod1'
+          }
+        })
+      })
+    }),
+    'package.json': File({
+      name: 'shrinkwrap-local-dependency',
+      version: '1.0.0',
+      dependencies: {
+        mod2: 'file:mods/mod2'
+      }
+    })
+  })
+)
+
+function setup () {
+  cleanup()
+  fixture.create(testdir)
 }
 
-var dependency = {
-  'author': 'Thomas Torp',
-  'name': 'npm-test-shrinkwrap-local-dependency-dep',
-  'version': '0.0.0'
+function cleanNodeModules () {
+  rimraf.sync(path.resolve(testdir, 'node_modules'))
+}
+
+function cleanup () {
+  fixture.remove(testdir)
 }
 
 test('shrinkwrap uses resolved with file: on local deps', function (t) {
   setup()
 
-  common.npm(
-    ['--cache=' + CACHE_DIR, '--loglevel=silent', 'install', '.'],
-    {},
-    function (err, code) {
-      t.ifError(err, 'npm install worked')
-      t.equal(code, 0, 'npm exited normally')
-
-      common.npm(
-        ['--cache=' + CACHE_DIR, '--loglevel=silent', 'shrinkwrap'],
-        {},
-        function (err, code) {
-          t.ifError(err, 'npm shrinkwrap worked')
-          t.equal(code, 0, 'npm exited normally')
+  common.npm(config.concat(['install', '--legacy']), {cwd: testdir}, function (err, code, stdout, stderr) {
+    if (err) throw err
+    t.comment(stdout.trim())
+    t.comment(stderr.trim())
+    t.equal(code, 0, 'npm exited normally')
 
-          fs.readFile('npm-shrinkwrap.json', { encoding: 'utf8' }, function (err, data) {
-            t.ifError(err, 'read file correctly')
-            t.deepEqual(JSON.parse(data), desired, 'shrinkwrap looks correct')
-
-            t.end()
-          })
-        }
-      )
-    }
-  )
+    common.npm(config.concat('shrinkwrap'), {cwd: testdir}, function (err, code, stdout, stderr) {
+      if (err) throw err
+      t.comment(stdout.trim())
+      t.comment(stderr.trim())
+      t.equal(code, 0, 'npm exited normally')
+      var data = fs.readFileSync(path.join(testdir, 'npm-shrinkwrap.json'), { encoding: 'utf8' })
+      t.deepEqual(JSON.parse(data), shrinkwrap, 'shrinkwrap looks correct')
+      t.end()
+    })
+  })
 })
 
+function exists (file) {
+  try {
+    fs.statSync(file)
+    return true
+  } catch (ex) {
+    return false
+  }
+}
+
 test("'npm install' should install local packages from shrinkwrap", function (t) {
   cleanNodeModules()
 
-  common.npm(
-    ['--cache=' + CACHE_DIR, '--loglevel=silent', 'install', '.'],
-    {},
-    function (err, code) {
-      t.ifError(err, 'install ran correctly')
-      t.notOk(code, 'npm install exited with code 0')
-      var dependencyPackageJson = path.resolve(
-        PKG_DIR,
-        'node_modules/npm-test-shrinkwrap-local-dependency-dep/package.json'
-      )
-      t.ok(
-        JSON.parse(fs.readFileSync(dependencyPackageJson, 'utf8')),
-        'package with local dependency installed from shrinkwrap'
-      )
-
-      t.end()
-    }
-  )
+  common.npm(config.concat(['install']), {cwd: testdir}, function (err, code, stdout, stderr) {
+    if (err) throw err
+    t.comment(stdout.trim())
+    t.comment(stderr.trim())
+    t.equal(code, 0, 'npm exited normally')
+    t.ok(exists(path.join(testdir, 'node_modules', 'mod2')), 'mod2 exists')
+    t.ok(exists(path.join(testdir, 'node_modules', 'mod2', 'node_modules', 'mod1')), 'mod1 exists')
+    t.end()
+  })
 })
 
 test('cleanup', function (t) {
@@ -94,28 +122,3 @@ test('cleanup', function (t) {
   t.end()
 })
 
-function setup () {
-  cleanup()
-  mkdirp.sync(PKG_DIR)
-  mkdirp.sync(CACHE_DIR)
-  mkdirp.sync(DEP_DIR)
-  fs.writeFileSync(
-    path.resolve(PKG_DIR, 'package.json'),
-    JSON.stringify(root, null, 2)
-  )
-  fs.writeFileSync(
-    path.resolve(DEP_DIR, 'package.json'),
-    JSON.stringify(dependency, null, 2)
-  )
-  process.chdir(PKG_DIR)
-}
-
-function cleanNodeModules () {
-  rimraf.sync(path.resolve(PKG_DIR, 'node_modules'))
-}
-
-function cleanup () {
-  process.chdir(osenv.tmpdir())
-  cleanNodeModules()
-  rimraf.sync(PKG_DIR)
-}